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Is China the next innovation economy?

September 08, 2014

We’ve been past the point of no return on the ‘China as rising economic tiger’ narrative already. A mix of analysis from smart people, fear-mongering and advocacy talking points either warn or embrace China’s pre-eminence as the fastest-growing economy on the planet and now the second-largest. How you talk about China is determined by where you stand in proximity to the Communist-capitalist hybrid behemoth of 1.4 billion people. If you’re in Asia, you can’t avoid Chinese dominance in your industry’s space while probably being alarmed by the reach of its military and current tensions. If you’re in the U.S., you want to cash in on that massive Chinese labor force and consumer market, but you’re harboring anxiety about how much they’ll compete with American geopolitical and economic dominance. Let the rivalry begin. In the meantime, China’s IT market—the second-largest in the world—is growing at a 10 percent annual clip while its fast-growing clean technology market is projected to reach a value of $500 billion by 2020.

Sappin Global Strategies CEO Ed Sappin says we shouldn’t let that get us down. “Though some U.S. companies will be surpassed by their Chinese counterparts, we are not at the beginning of a no-holds-barred innovation arms race. Chinese innovation is not occurring in a vacuum,” wrote Sappin in a Washington Post op-ed in March as he argued that China’s rise as an innovation capital is actually a good thing for American companies. “For a young company in China aspiring to be a global player, the United States will be an important proving ground. Likewise, American companies will find that China, with a flourishing consumer base, is an important test bed and market for their innovations.”

Meanwhile, an interesting question comes up: Is China actually the next big innovation hub? Vice President Joe Biden pressed the question to cadets during a U.S. Air Force Academy commencement speech. "China - and it's true - is graduating six to eight times as many scientists and engineers as we have,” said Biden. “But I challenge you: name me one innovative project, one innovative change, one innovative product that has come out of China." European Centre for International Political Economy Senior Fellow Guy de Jonquières completely ripped apart the China innovation narrative by offering an analysis on why it wasn’t really all that innovative. “Surging national patent applications, it turns out, have been spurred less by an explosion of innovation than by numerical government targets for filings and lavish state incentives to ensure they are met,” wrote Jonquieres in a special to CNN. “This looks suspiciously like a case of ‘Never mind the quality, just feel the weight.’”

That discussion, however, is not all one-sided. Shaun Rein, managing director of the China Market Research Group, would disagree. Rein highlights increasing blue collar wage growth at a rate of 15-20 percent a year, in addition to double-digit rent increases, as well as a shift of cheap labor cores to neighboring smaller economies like Cambodia, Vietnam, Sri Lanka and others. The next phase for China is, naturally, innovation, says Rein. “The market is maturing, competition is going up, and companies are moving up to value chain. So a lot of entrepreneurs say: ‘How do we stay ahead? How do we beat the competition?’ Now it’s not about low cost. It’s not about sales and distribution. It’s about… innovation.” CNN’s Kristie Lu Stout reports on China being an innovation “hotbed,” especially with its 700 million “active smartphone users” (twice the size of the U.S. population).

Of course, China will have to transition quickly into a new steady state, particularly as its economy slows to a 7.4 percent growth rate this year compared to nearly 11 percent growth in the last decade. Morphing quickly into an innovation economy seems like the next natural step. However, there are serious questions about whether that will be real innovation or whether it will mean, simply, faster and cheaper ways of manufacturing existing and new technologies. Gartner’s Uko Tian, Venecia K Liu, Tracy Tsai and Eileen He show robust growth in China’s IT sector at 8.4 percent in 2014 in a recent emerging market analysis. But they also caution that “there are significant differences in IT maturity and technology adoptions among different geographies and industries across China.” Forrester’s Charlie Dai also talks about the Chinese banking system’s “severe” challenge in meeting the demands of the “customer-centric” paradigm.

Still, Gartner predicts, “Urbanization will continue to be a growth driver influencing the government's economic policy. In the next four years, about 20 million people every year will move to cities. This will drive investment in various verticals, such as infrastructure, healthcare and education.”

Despite the mixed signals on Chinese innovation, there’s no ignoring the rapid increase in major sectors of its economy eventually driving innovation. However, it may take a while for the country to adjust, particularly as its government is presently struggling through a wave of corruption crackdowns spearheaded by its President Xi Jinping (which some observers point out is actually a power consolidation). Yet that may be all part of the larger plan to prepare China for the innovation phase. Even though outside firms and vendors would be wise to look more deeply into rumors of Chinese innovation before jumping in, they should also be prepared to serve this massive market with talent and expertise. The troubles faced by Chinese banks mentioned above should open an opportunity for foreign firms that can provide Chinese financial service institutions with the type of expertise and strategic advisement needed to address those deficiencies. Hence, Sappin’s point ultimately resonates.

Charles Ellisonis a senior analyst relations strategist for TEKsystems. He keeps close tabs on changes and public policy shaping the innovation space. He is also a former congressional staffer, senior aide to state and local elected officials and an expert advocacy strategist. You can reach him with questions and comments @twoARguys via Twitter.